Venezuela’s phantom oil

Commentary: Hugo Chávez isn’t his nation’s only vanishing act

SAN FRANCISCO (MarketWatch) — Venezuelan President Hugo Chávez won’t be at his inauguration ceremony today in Caracas. He’s still in Cuba and gravely ill following another round of heavy-duty cancer treatments.

Reuters

President Hugo Chávez holds an oil sample at a facility in the oil rich Orinoco belt.

To calm the faithful and quiet critics, high-court judges conveniently ruled that the ceremony can be postponed. Legislators argued that Chávez, in fact, doesn’t need to be physically present to be reconfirmed to another six years in the country’s top office. A symbolic swearing in of his presidential sash is apparently enough.

Chávez isn’t the only absentee today. Since 1999, his first year in the presidential palace, about 30% of Venezuela’s oil production has gone missing.

According to the Energy Information Administration, Venezuela’s crude output peaked around 1997 at 3.5 million barrels a day. These days it’s closer to 2.5 million.

This is a huge loss for Venezuela. Even at these reduced production levels, oil accounts for about 95% of the nation’s export earnings and 40% of government revenue. What happened?

Basically, the decline rests on three things: falling production on existing fields, maintenance problems and shrinking foreign investment.

Industry analysts lay these problems at Chávez’s feet. His 2007 push to nationalize energy assets was decried across the industry as an illegal seizure of billions of dollars of private holdings.

Chávez saw it differently, claiming he was merely ensuring that the country’s strategic resources were in the hands of Venezuela, not a loose federation of multinational corporations.

The move also gave him access to more money to fund social programs, a real bonanza during the 2008 spike in global oil prices. But the net impact on Venezuela’s oil industry was catastrophic, launching an exodus by overseas companies and creating an expertise vacuum that severely downsized and underfunded state-oil company Petróleos de Venezuela SA simply could not fill.

This produced a string of maintenance problems, most dramatically the explosion last August at Venezuela’s giant Amuay refinery, which killed nearly 50 people and knocked out about 25% of its refining capacity. The loss was felt almost immediately in the U.S. gasoline market, which relies heavily on exports of Venezuela’s refined-petroleum products.

Chávez supporters rally

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While Venezuelan president recovered from cancer surgery, his turn out on what would have been his inauguration day. Video by WSJ's Ángel González via #WorldStream.

But the impact of the fire, and for that matter, declining Venezuelan crude output have been muted by production gains elsewhere. This is especially true in the United States. Last week the Energy Department, citing the boom in domestic oil-shale output, predicted U.S. oil imports will hit a 25-year low next year.

Presumably, some of the capital now being pumped into development projects in places such as North Dakota would have gone to Venezuela. So in a curious twist, Americans might consider thanking Chávez for indirectly stimulating investment in domestic oil reserves.

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